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Shorts Get Squeezed in Barnes & Noble

Shares of book seller Barnes & Noble (NYSE: BKS) soared on Monday morning after the company said that it has struck a joint venture deal with Microsoft (NYSE: MSFT) which will combine Barnes & Noble's Nook digital reader and college businesses. Microsoft will invest $300 million in the new subsidiary.

The investment will give MSFT a roughly 18% stake in the new unit, with BKS owning the rest. Bloomberg reports that "the venture will develop a Nook application for Windows 8, the newest version of Microsoft's operating system that's scheduled for release this year, expanding Barnes & Noble's digital bookstore to hundreds of millions of customers."

The news sent BKS shares skyrocketing in pre-market trade on Monday. At one point, the stock had doubled to more than $28.00. The frenzied reaction in the name is largely attributable to a truly epic short-squeeze.

In recent days, roughly 71% of the stock's float had been sold short by traders looking to profit from falling prices. When the news about Microsoft's $300 million investment in a new unit of Barnes & Noble hit the wires, these short-sellers began covering their positions at huge losses.

The stock has been falling since its huge gap up at the open, however, and at last check BKS shares were trading up around 64% at $22.46 after opening the day at $25.79. This suggests that a good deal of the pre-market spike was triggered by panicked short-sellers, although the announcement is certainly positive for the company.